In contrast to a temporary administrator, an external administrator is, in fact, not limited in his powers. It is during external administration that takeovers of enterprises occurred and/or certain actions were committed in order to withdraw assets and thus to avoid the fulfillment of due obligations. For this end, a wide variety of schemes were applied – from the simplest, involving property removal, to rather intricate ones, envisaging the changing of the structure of a debtor’s shareholders and the creation of affiliations. It should be noted that some of the schemes were “universal”, i.e., could be applied, almost without changes, for taking over a debtor’s business or for “protecting” it from creditors. For example, property removal was a “protective” measure, if it was re ceived by structures related to the debtor’s owners, and was a form of a business takeover, if the property was being transferred to creditors or their affiliated companies. Other schemes were “unidirectional”: for ex ample, the structure of a debtor’s shareholders was usually changed for the benefit of some of the creditors, while the formation of affilia tions, as a rule, was orientated at maintaining the control of the debtor’s founders and CEOs over its most valuable assets. And the key role in implementing each of the schemes was to be played by the external administrator.

November 1, 1997. An external administrator comes to the enter prise – Vladimir Aliabiev, recommended by the Guild of Anti Crisis Managers, whose Head is Grigorii Yun. On the same day (!) he replaces the security staff at the enterprise.

November 3. The new security officers confiscate the passes and forbade the employees to enter the enterprise.

November 4. The Director of the Limited Partnership “Luka” is ap pointed to the post of director of operations, and orders that all supply contacts be rewritten, to make the Limited Partnership “Luka” the sole supplier.

December 11. The Guild’s Head, Grigorii Yun, has a meeting with representatives of the enterprise’s employees. They are informed that Volkov A. et al, Sanitary i marodiory.

no wages will be paid. Money is promised only to those who will be come employed by the Limited Partnership “Luka”.

December 12–13. The tools from the central tools warehouse and the materials from the operation material warehouse are being re moved.

March 25, 1998. The enterprise, in effect, has terminated its exis tence. An order concerning the termination of operations is issued. The whole operation has been carried out within five months167.

Example 2. Achinsk Aluminous Combine (AAC). In the era of the So viet Union, the Combine was considered to be the largest alumina pro ducer and supplied aluminum plants with raw material, primarily the Krasnoyarsk plant (KAP). However, the Combine was unable to adjust to the market economy, and at the end of 1996 was, in effect, bank rupt. External administration was imposed, and the administrator’s post was given to Gleb Fetisov, who previously had been employed by the “Alpha” Group. At that moment, the interests of the “Alpha” Group and the Krasnoyarsk plant coincided, and so the latter voiced no objections as to this candidate. However, in a year and a half, the CEOs in charge of the KAP were replaced, and by mid 1998 the KAP and “Alpha” were allies no more. In the summer of 1998, five Russian aluminum plants (including the Krasnoyarsk plant) came forth with the initiative to ap point a new person in Achinsk. The Arbitrage Court of Krasnoyarsk Krai gave support to this initiative, and on 30 July the nominee of the alumi num plants, Nail Nasyrov, was appointed external administrator. But when the new external administrator began to execute his responsibili ties, he found that during the period when Gleb Fetisov had been in charge, all the AAC’s main assets had become property of the compa nies affiliated to the “Alpha” Group.

The scheme according to which the Combine’s property was alien ated is somewhat more sophisticated than the one described in Exam ple 1. In early 1997, the Achinsk Aluminous Combine took two loans from the Alpha Bank, in the total amount of 25 billion non denominated roubles. Simultaneously, the Combine formalized two suretyship con tracts with the Open Joint Stock Company “Alpha Eko”, the main con tent of which was as follows. “Alpha Eko” was guaranteeing that it It should be noted that this example occurred in the period during which the 1st Law on bankruptcy was in force.

would be able to repay the loans instead of the AAC, but in that case the fines imposed on the Combine were to amount to 1 per cent per day.

The fines became effective since the spring of 1997, after the Open Joint Stock Company “Alpha Eko” had repaid to the Alpha Bank the loans granted to the Combine. By February 1998 the Combine’s total debt to “Alpha Eko” had exceeded 100 million denominated roubles, due to which Gleb Fetisov, the bankruptcy commissioner, made the decision to repay the Combine’s debt. Between March and May, the Achinsk Aluminous Combine repaid the debt, by transferring to “Alpha Eko”, in effect, all its main assets in the amount of 75 million roubles, finished products in the amount of 25 million roubles, as well as the right to a five year lease of the property complex of the Kiia Shaltyr mine, where the AAC’s main raw material, nephelin, was extracted168.

Example 3. Leningrad Metallurgical Plant (LMP). The plant’s exter nal administrator, Yevgenii Guliaev, by commission of the creditors’ council, submitted to the Federal Securities Commission the necessary documents for effectuating an additional issue of shares, without any decision to this effect on the part of shareholders. At the moment of this issue, the LMP was an object of interest for two large business struc tures: “Energomashinostroitel’naia korporatsia” (Power Machine building Corporation) and “Interros”. The former was the plant’s main shareholder (32%), the latter had in control a stake of 16% and the main bulk of its creditor indebtedness. And this additional issue of shares was to result in the growth of the stake owned by “Interros” to the size of a controlling stake (51%)169.

Yet another one of the schemes mentioned above is as follows. In the course of external administration, it was found necessary to separate several (the most efficient) operation units into independent enter prises. The parent company (the bankrupt enterprise) established one or several subsidiaries, which it fully owned. Then the decision was made to more than double the subsidiaries’ charter capitals. The shares additionally issued in this connection were not transferred to the parent company, but instead, for example, were cross exchanged be tween the subsidiaries. As a result, the bankrupt enterprise lost control over its most valuable assets. Later, in the course of bankruptcy pro Volkov A. et al, Sanitary i marodiory.

Butrin D., Neupravliiaemyi upravliiaushchii.

ceedings, only the non controlling blocks of the subsidiaries’ shares, which remained the enterprise’s property, were offered for bidding170.

After the period of external administration is over, the external ad ministrator may be replaced by a receiver, whose main task would be to sell the bankrupt enterprise’s property. Among the most common abuses committed by receivers we may point out the sale of property at an underestimated price.

Within the framework of bankruptcy proceedings at the Petro zavodsk Aviation Plant, receiver Mikhail Mordashev effectuated the sale of the property, which constituted the mass of the bankrupt’s estate, in a “very original” manner. For example, the price of the “Ka 26” helicop ters was set at 70,000 roubles (their market price being $20,000 — 50,000)171.

As for the main “clients” who order bankruptcy procedures in order to take over a business (who are, in effect, the beneficiaries), in many instances there were large business group related to the bankrupt’s area of activity. Bankruptcy, in this instance, represented just one of the lower cost variants of integrating new enterprises and operation units into the target association’s structure. During the period when the 2nd Law on bankruptcy was in force, real empires were created, consisting of insolvent plants.

For example, the owners of the “Evroazmetall” Group, in two years, were able to create, by way of imposing external administration on those enterprises that were of interest to them, a very powerful metal lurgical alliance, with an annual turnover of about $ 2 billion172.

Beside private structures, active participants in “strange” bankrupt cies were also regional administrations, striving to redistribute, for their own benefit, the control over their region’s enterprises. The established procedures were thus applied by local authorities as a means for taking over the administration of enterprises owned by the federal center or by private investors, as well as an instrument for “protecting” the enter prises, which were (formally and actually) under their control, from un related creditors.

Volkov A. et al, Sanitary i marodiory.

Butrin D.,Neupravliiaemyi upravliiaushchii.

Butrin D., Neupravliiaemyi upravliiaushchii.

It should be noted that while business structures during the effec tuation of orchestrated bankruptcies were relying primarily upon bank ruptcy commissioners, local authorities, in addition, could “secure the support” of arbitrage courts, because the latter, as a rule, depended on regional bodies of authority. Of course, under Russian legislation, all arbitrage courts are in federal jurisdiction, and thus cannot be influ enced by local administrations. However, in actual practice, due to the insufficiency of federal financing for arbitrage courts and the distance (both political and physical) from the federal center, arbitrage courts are highly dependent upon regional authorities.

The enterprise’s CEOs were active allies of regional administrations in the struggle with the federal center and external investors. Regional leaders had an interest in keeping revenues inside their regions and maintaining a high level of employment, CEOs – in maintaining their control over enterprises. The former quite often guaranteed to the latter their protection in exchange for certain “services”, like timely payment of all regional taxes, ensuring redundant employment, etc. And in the event of an enterprises bankruptcy being initiated, the governor, through pressure exerted on the arbitrage court, secured the appoint ment of “the necessary” commissioner (for example, one of the CEOs), who then acted for the governor’s benefit173.

Concluding our discussion of the period during which the 2nd Law on bankruptcy was in force, we should like to note that despite the mass scale character of the abuses and violations of law committed by bank ruptcy commissioners, they almost never were brought to serious re sponsibility for their actions. As a rule, the worst outcome for a bank ruptcy commissioner (not counting the possibility of a criminal method of settling the scores with him) was the recalling of a professional li cense.

“Kuzbassenergo”, committed large scale manipulations with debt amounts when forming the register of creditors174.

5.2. Late 2002 – the present time The inefficiency of the 2nd Law on bankruptcy in the part concerning the prevention of “strange” bankruptcies (both of the “takeover” and “protection” types) became one of the main reasons for the elaboration and adoption of the new (third) Federal Law of 26.10.2002 No. 127 FZ “On insolvency (bankruptcy)”. More than one and a half years has passed since its coming in force, but disputes thereof are still going on.

It should be noted that at first – during the period of its elaboration and in the first few months after its enactment – this Law was regarded very sceptically (if not negatively) by the experts’ community. However, even the most militant critics of the new Law remarked that it had a number of advantages, as compared to the federal law previously in force – that of “On insolvency (bankruptcy)” 08.01.1998 No. 6 FZ (hereinafter – the previous law), a more complicated procedure for the initiation of bank ruptcy, tougher requirements to bankruptcy commissioners, their with drawal from the sphere directly influenced by the State, and some oth ers175. However, at the same time, the majority of experts were sharing the viewpoint that despite having certain advantages, however impor tant, the new Law, by the level of its quality, did not differ so much from the previous law, which had been very unsuccessful and imperfect. It was commonly believed that the new Law inherited the main limitation of the previous law – the inability to prevent corruption and violations by the interested parties in the course of the bankruptcy process176. In this context, some experts rather negatively estimated one of the principal innovations of the new Law – the requirement that the responsibility of bankruptcy commissioners be insured on a mandatory basis, because they believed that the necessity to seek considerable funds for the Butrin D., Neupravliiaemyi upravliiaushchii.

payment of the insurance premium would inevitably made bankruptcy commissioners dependent on the persons who had provided these funds, and would thus enable the latter to exert pressure on the com missioner and, consequently, to influence the process of bankruptcy.